Hungary has reduced its key interest rate for the second straight month in an attempt to ease the pressure the EU’s highest borrowing costs are piling on the country’s economy.
The central bank slashed the overnight deposit rate by a percentage point to 16%, in line with forecasts from economists polled by Bloomberg.
Whereas the base interest rate was held at 13% as predicted.
Policymakers are attempting to balance the objective of cutting interest rates with the goal of curbing inflation, which, although decelerated for the fourth straight month in May, still surpassed the 20% mark.
Hungary’s central bank and the government have both forecast inflation to fall under 10% by December.
“In the current environment, a cautious and gradual approach is warranted” in monetary policy, according to a central bank statement. “If the improvement in risk perceptions persists, the Bank will continue the gradual convergence of the interest rate conditions of one-day tenders to the base rate.”
The National Bank of Hungary is now focused on the Forint, which is among the world’s most volatile currencies, Bloomberg reports. Yet at the time of writing, the Forint gained 0.3% to 372.4 per Euro, the best performer out of 23 emerging market currencies on Tuesday, after the Philippine Peso.
Hungary’s currency has made gains of 7% against the Euro so far this year and has been trading in a tighter range since the rate cut in May, the first in three years.
In addition, the 10-year government bond yield declined eight basis points to 7.26% following the rate cut. Over the last month, it has fallen 69 basis points as Prime Minister Viktor Orban unveiled a new tax on bank deposits.
On Tuesday, central bank deputy governor Barnabas Virag echoed the rate cut plan will continue in “gradual steps”, which is forecast to indicate 100 basis points a month. He added that aligning the key interest rate with the 13% base rate in September was “realistic,” the Bloomberg report adds.
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